How America Can Escape the Energy Trap

Soaring natural gas production has already cut the share of oil consumption met by imports to 47% last year from 60% in 2005.

By Mort Zuckerman

A Louisiana Shale Gas Well

Can America escape the energy trap? Must our lives and security be forever held hostage to the vagaries of political power in the Middle East oil states? The answers to these questions are yes, and no. Thanks to American technology and enterprise, we can achieve a degree of energy security that once seemed hopeless—but only if we can sort out our priorities.

The good news is that the United States is at the center of a global energy revolution. Our development of innovative shale-gas technology offers the prospect of a huge bonanza of natural gas (and some oil as well). It’s the most positive event in the country’s energy outlook in 50 years. Let’s celebrate the achievement before looking at what needs to be done to bring it to fruition.

Our geologists have long been aware that gas (and oil) lies hidden in the country’s shale beds and under the ocean, but we had no chance to extract it until American entrepreneurial energy inspired companies to gamble on new technologies. In a phrase, technology has trumped geology. Advances in computer-processing power yielded seismic mapping and three-dimensional imaging, enabling geologists to “see” through the thick layers of rock and salt obscuring the reservoirs thousands of feet below the surface. And new drilling technologies allow us to penetrate thousands of feet of rock, turn a corner, and continue drilling horizontally for several thousand more feet to reach millions of cubic feet of gas.

It’s trapped in the shale, but it can be released by the process known as hydraulic fracturing, or “fracking.” Millions of gallons of water, sand and chemicals are blasted in at high pressure. Fissures open up, and gas and oil seeps out.

The process of finding and producing hydrocarbons from this shale has taken off with such velocity that it has already significantly altered government and corporate energy expectations. The production costs of shale gas are about one-half to one-third the costs associated with new conventional gas wells in North America. The result is a glut of new supply and plummeting prices.

This kind of seismic shift in the energy landscape is rare. It could bring us back to the time when the U.S. and its neighbors in the hemisphere were self-sufficient and even a major world source of energy. Energy companies have become exporters, as the U.S. has surpassed Russia as the world’s leading gas producer.

So what’s the snag—and how serious is it? Continue reading

Shell: China’s shale gas less economical than U.S. gas but more than LNG

Chief Financial Officer Simon Henry said Shell had not yet determined the cost of producing shale gas in China but that it would probably be within the $2 to $6 per million British thermal units (Btu) seen in North America, a level that would be competitive with alternative gas sources.

“We completed 11 wells last year; we hope to effectively double that this year … We are seeing a mixed range of outcomes, everything from pretty poor reaction to excellent,” he told reporters on a call on Thursday.

The development of hydraulic fracturing, or “fracking”, as a technique for extracting natural gas from shale rock has led to a surge in gas production in the United States that has driven down energy costs and reinvigorated U.S. industry.

The U.S. Energy Information Administration has said China has even larger shale resources than the United States, but many companies have questioned whether the resources can be developed economically.

Henry, who also has executive responsibility for overseeing Shell’s China operations, said it was more difficult to extract gas from Chinese reservoirs, on average, than what Shell had seen in the United States.

But he expects production costs to come down, making Chinese shale economic at the $5 to $6 per million Btu level that Shell receives for its current, conventional gas production in China, and well below liquefied natural gas (LNG) import prices of around $16 per million Btu. Continue reading

American Energy Independence?

How close are we to energy independence? Robert J. Samuelson at the Washington Post provides the data and offers some conclusions. He writes:

First, some background on U.S. oil and natural gas resources: Start with gas. In 2000, U.S. supplies were estimated at about 1,000 trillion cubic feet (annual consumption: 22 trillion to 24 trillion cubic feet); now, estimates cluster around 2,000 trillion cubic feet, with some even higher. The increases mostly reflect shale gas, which was once believed too expensive to produce because it was packed tightly in formations. “Fracking” (injecting water into the formations to free the gas) and horizontal drilling (extending one pipe along the formation instead of drilling many vertical wells) lowered costs. Continue reading

Natural Gas, Fueling an Economic Revolution

Fareed Zakaria explains at the Washington Post how shale gas is fueling an economic revolution:

[The increase in shale gas production] might also help explain why high oil prices are not slowing down the U.S. economy as much as has been feared. Robert Hefner, a natural gas entrepreneur and author of “The Grand Energy Transition,” points out that the cost of heating 65 million American homes by natural gas has fallen $20 billion annually.

The environmental concerns are well taken. But the best studies out now — such as one by a committee that included the head of the Environmental Defense Fund — suggest that fracking can be done in a safe and responsible manner. Many of the riskiest practices are employed by a small number of the lowest-cost producers, a situation that calls for sensible regulation. Larger companies would probably welcome a set of rules, because they would want to follow best practices to protect their reputation and brand.
Continue reading

A Whole New Energy Infrastructure

Peter Gardett at AOL Energy explains how the U.S. will need a whole new energy infrastructure in the coming decades, creating tremendous opportunities for job creation and investment:

Transformative price shifts and innovative technology combined with an aging existing infrastructure leave the US energy sector looking more like that of an emerging economy than a traditional developed one: And that’s a good thing.

Infrastructure in the energy sector is still built to serve an economy that looks more like the 1950s than 2012, with a transport sector almost entirely dependent on oil products and a centralized hub-and-spoke electricity system dependent on a blend of coal and nuclear with natural gas and renewable generation still in the minority. Continue reading

China to boost shale gas output

BEIJING (MarketWatch) — China’s annual output of shale gas is expected to skyrocket from virtually zero now to 6.5 billion cubic meters in 2015, and to at least 10 times that amount just five years later, helping the country reduce its reliance on dirtier coal and cut its carbon emissions, the government said in a shale gas development plan released Friday.

China is expected to have identified total exploitable gas reserves of 200 billion cubic meters by 2015 and total proven reserves of 600 billion cubic meters, it said. Continue reading

The Ugly Politics of Higher Gasoline Prices

Gary Hunt, President of Scalable Growth Strategy Advisors, wrote on Sunday concerning the nature of higher gasoline prices. He provides the exact figures for the increase in gasoline prices that we all have noticed:

The impacts of higher oil and gasoline prices are beginning to ripple across the economy. Wells Fargo Economics reported today that higher energy prices increased the producer price index (PPI) by 0.4 percent in February 2012 which was the highest monthly gain in the PPI in five months. Wholesale gasoline prices were up for the second-straight month, increasing 4.3 percent, home heating oil was up 5.3 percent and residential electric power prices increased 0.6 percent.

Mr. Hunt explains, however, that energy prices overall have not one up as much as they could have because of the development of shale gas resources. He writes:

The growth in domestic natural gas production from shales has decoupled natural gas prices from global oil prices as supply exceeds demand helping to mitigate the inflationary impact of oil prices. As a result of the growth in natural gas supply availability, finished goods energy prices increased only 1.3 percent last month which is still a big increase but smaller than oil driven energy price increases.

Domestic oil production has also risen dramatically in the past two years (see the chart above). Here are some of the specifics:

  • Texas. The Eagle Ford shale formation in south Texas contributed to gains in the state’s oil production, which averaged 1,425 thousand barrels per day (bbl/d), the highest level since 1997.
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